Economic substance requirements extended to partnerships

After approval by Cabinet, government published two sets of amended regulations that will bring general, limited, exempted limited, and foreign limited partnerships under the scope of economic substance requirements.

The International Tax Co-operation (Economic Substance) (Amendment of Schedule) Regulations, 2021 and the International Tax Co-operation (Economic Substance) (Prescribed Dates) (Amendment) Regulations, 2021 is coming into force today (30 June).

As a result, all partnerships will be required to notify the Tax Information Authority each year if they are subject to economic substance laws and whether they were carrying on one of the activities defined in the legislation.

There are more than 32,000 active partnerships registered in Cayman as of April 2021. Only partnerships that engage in relevant economic substance activities will be required to file an economic substance return and meet an economic substance test.

Relevant activities are fund management, banking, insurance, finance and leasing, distribution and service centre business, headquarters business, intellectual property business and holding company business.

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Because investment funds, domestic companies, and local partnerships are not considered to be conducting relevant economic substance activities, they are not required to submit an economic substance return.

But they and other entities must still notify the authority.

Those entities that are engaged in relevant activities must demonstrate that they generate core income in Cayman, are locally managed, and have an adequate economic presence on island in terms of offices, staff or expenditures.

Financial Services Minister André Ebanks said in a press statement the regulations address the European Union’s tax good governance initiative, which has assessed tax regimes in countries including Cayman, Bermuda, Guernsey, Isle of Man and Jersey. Following the assessment, the EU requested these countries to extend economic substance requirements to partnerships.

“These changes ensure that Cayman remains strong and cooperative with international tax compliance,” Ebanks said.

Partnerships formed on or after 1 July 2021, are required to meet economic substance requirements from the date they begin relevant activity.

Partnerships formed before 1 July, must satisfy the economic substance test from 1 Jan. 2022.

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